By Calvin Biesecker
Northrop Grumman [NOC] yesterday reported positive net income in the fourth quarter versus losses a year ago that were due to impairment charges, although continued losses on a state information technology contract and a big drop in operating margins at its shipbuilding operations weighed on the earnings growth.
Net income in the quarter was $413 million, $1.31 earnings per share (EPS), versus a $2.5 billion loss ($7.75 EPS) a year ago. Earnings from continuing operations were $375 million ($1.19 EPS). Consensus estimates were $1.26 EPS. The fourth quarter 2008 losses stemmed from a decline in the stock market, which had a negative impact on the value of some of its businesses.
Sales in the quarter rose 2 percent to $8.9 billion from $8.8 billion and exclude contributions from the former TASC advisory services business that Northrop Grumman sold late last year. Backlog at the end of the year was $69.2 billion, down from $76.4 billion from a year ago due mainly to the termination and restructuring of two programs.
The Aerospace and Technical Services segments drove the top and bottom line operating gains. Technical Services, the company’s smallest segment, posted double-digit sales and operating income growth, boosting margins on the higher sales and improved performance.
The Aerospace segment posted solid sales gains on increased demand for manned, unmanned and classified programs. Margins and operating income increased on the higher sales and favorable contract performance adjustments.
Shipbuilding swung to a profit, even after adjusting for the impacts of the impairment charges, due to performance issues with the LPD shipbuilding program for the Navy. This program will continue to be a headwind on profit growth at the company because it represents significant future sales volume albeit at a very low margin rate, Wes Bush, Northrop Grumman’s president and CEO, said on yesterday’s earnings call.
Operating profits were further weighed down by the Information Systems and Electronics Systems segments. At Information Systems, the company continues to lose money on an information technology outsourcing contract with the State of Virginia.
Bush has said before that the company is “stepping back” from IT outsourcing opportunities at the state and local level, saying yesterday that this is a “market that we do not deem to be particularly attractive. As a result, that is causing this aspect of the business to reduce over time.”
Bush also repeated warnings that the company may back out of the Air Force’s aerial refueling tanker competition if the Request for Proposals (RFP) doesn’t adjust the scoring value for capabilities that exceed the minimum threshold. Northrop Grumman’s offering is based on the Airbus A330 commercial aircraft, which Bush said is a larger plane and “inherently more capable,” which entails a little higher cost.
“So without that value recognition methodology in the final RFP, we are fundamentally disadvantaged in the source selection evaluation process so there are a variety of factors that go into our conclusion that unless we see some major restructuring in this final RFP this is simply an unattractive proposition for our company to pursue bidding on,” he said.
Bush also said that going forward the company is going to eye all of its business opportunities more carefully with regard to how they will improve margins and performance as opposed to growth.
For the year, Northrop Grumman also swung to a profit, posting $1.7 billion ($5.21 EPS) in net earnings versus a $1.3 billion ($3.77 EPS) loss in 2008. Free cash flow for the year was $1.4 billion. Sales in 2009 increased 4 percent to $33.8 billion from $32.3 billion a year ago.
In 2010, sales are expected to grow slightly to between $34 billion and $34.6 billion with growth at Electronic and Information Systems and Technical Services partially offset by declines at Shipbuilding. Aerospace sales are expected to be flat. Earnings are expected to be between $5.70 and $5.95 EPS, with growth coming from overall margin rate improvements and a lower share count.